BofA ekes out profit as crisis-era costs drag

Bank of America Corp.'s profit fell 95 percent in the third quarter as the second-largest U.S. bank remained haunted by businesses it purchased during the financial crisis. The bank earned US$340 million in the quarter after taking US$1.6 billion of litigation charges from a settlement tied to its 2009 purchase of investment bank Merrill Lynch & Co. Its disastrous purchase of mortgage lender Countrywide Financial in 2008 also continues to drag on results.

And Bank of America's overall expenses edged higher, even after a year of cost cutting, including thousands of layoffs.

"This is still a bank that has an awful lot of work to do," said Gary Townsend, chief executive of Hill-Townsend Capital in Chevy Chase, Maryland. "How long of a runway do they need to build up speed to actually take off?"

Chief Executive Brian Moynihan is still struggling to fix Bank of America even as rivals Wells Fargo & Co. and JPMorgan Chase & Co. show signs they have moved past the financial crisis, reporting a combined US$10.6 billion of profits for the quarter.

Like other large banks, Bank of America reported a surge in mortgage banking income as homeowners refinanced at low interest rates, and it set aside less money to cover bad loans. The bank also posted a big increase in bond trading revenue.

Bank of America has drastically scaled back its mortgage business after taking billions of dollars of losses from its Countrywide purchase. But in recent quarters, it has been bringing on more loan officers in an effort to recapture some of its lost market share.

Mortgage banking revenue climbed 25 percent from a year ago to US$2 billion. In a conference call with analysts, Thompson said he expected the mortgage boom "to continue through the lion's share of 2013."

The bank, however, still faces potential pain from old loans.

In its earnings presentation, the bank said it could lose up to US$6 billion above its current reserves on repurchase claims from Fannie Mae and Freddie Mac as well as private investors. It previously said its losses beyond reserves could be up to US$5 billion for private investors only.

Thompson said the bank updated its estimate after further discussions with the government-controlled mortgage finance companies. The bank still has disagreements with Fannie Mae over what claims should be paid and has not reached any settlement with the agency, he said.

The bank stopped selling some loans to Fannie Mae earlier this year as the tension over the dispute mounted.

S&P Capital IQ analyst Erik Oja kept a "sell" recommendation on the stock because of the potential costs that lie ahead. He said he was concerned the bank has not been setting aside enough additional money to cover expected losses.

"They've taken very small provisions in the last five quarters," Oja said, adding that the bank has been adding an average of about US$300 million to its reserves each period. "That to me points to another large provision."

Bank of America had US$16.3 billion in reserves for repurchase claims at the end of the third quarter, up 2 percent from the previous quarter.

In a positive, the bank reported further improvement in its capital ratios, largely by reducing riskier assets on its balance sheet. The bank said its Tier 1 common capital ratio, under proposed new Basel III capital rules, rose to 8.97 percent from 7.95 percent in the second quarter.